U.S. inflation showed little change in July, while household incomes continued to rise, giving the Federal Reserve another reason to take a cautious approach to interest rates as it prepares for its September policy meeting.
The personal consumption expenditures (PCE) price index increased 0.2% in July from the previous month, according to data released Wednesday by the Bureau of Economic Analysis. The core PCE index, which excludes food and energy prices, also rose 0.2%. Core inflation was up 3.3% from a year earlier, while overall PCE inflation increased 3.7% over the same period. (Bureau of Economic Analysis)
Both measures remain above the Federal Reserve’s 2% inflation target, keeping pressure on policymakers to ensure that price increases continue to moderate before considering lower interest rates.
Household income rises as spending slows
The July report also showed a mixed picture for consumers.
Disposable personal income increased 0.5% during the month, while personal consumption expenditures rose 0.2%. That was slower than the 0.3% increase in consumer spending recorded in June. Real PCE, which adjusts spending for inflation, was essentially unchanged in July. (Bureau of Economic Analysis)
The increase in income was driven largely by higher compensation, government social benefits and income from assets, according to the BEA.
Americans also saved more. Personal saving reached $712 billion in July, lifting the personal saving rate to 3%, compared with 2.7% in June. (Bureau of Economic Analysis)
The combination of stronger disposable income and slower real spending could become important for policymakers as they assess the strength of consumer demand.
Fed faces a divided outlook
The Federal Reserve left its benchmark interest rate unchanged at a target range of 3.5% to 3.75% at its July 28-29 meeting.
The decision was not unanimous. Nine policymakers supported holding rates steady, while three favored a quarter-point increase. The dissenters were Fed governors Beth Hammack, Neel Kashkari and Lorie Logan. (Federal Reserve)
The Fed has emphasized that inflation remains above its 2% goal. Officials also pointed to uncertainty surrounding the economy, including the effects of supply shocks and the conflict in the Middle East. (Federal Reserve)
That makes the next inflation readings particularly important. Policymakers will have to determine whether recent price increases are temporary or whether inflation is proving more persistent than expected.
The Fed’s next policy meeting is scheduled for Sept. 15-16. (Federal Reserve)
Economic growth is losing momentum
The latest inflation data comes as broader economic growth has slowed.
The U.S. economy expanded at a 1.5% annualized rate in the second quarter, according to the BEA’s second estimate, down from 2.1% growth in the first quarter. Consumer spending, exports and investment contributed to second-quarter growth, while government spending declined. (Bureau of Economic Analysis)
Slower growth could give the Fed another reason to avoid tightening monetary policy unless inflation begins to accelerate.
At the same time, policymakers cannot easily dismiss persistent inflation. The core PCE index remains 3.3% above its level a year earlier, well above the Fed’s 2% objective. (Bureau of Economic Analysis)
Consumer confidence remains weak
Households are also showing some concern about the economic outlook.
The Conference Board’s Consumer Confidence Index fell 0.8 points in August to 89.4, its second consecutive monthly decline. While consumers’ assessment of current conditions improved, their expectations for income, business conditions and the labor market weakened. (The Conference Board)
The Expectations Index fell 5.8 points to 68.2, remaining below the level historically associated with a recession warning. (The Conference Board)
For the Federal Reserve, the latest numbers offer no clear signal for an immediate change in policy. Inflation is still above target, but consumer spending has slowed, economic growth has moderated and household expectations have weakened.
That leaves policymakers with a difficult balance: keeping rates high enough to contain inflation without putting unnecessary pressure on an economy that is already losing some momentum.
